UK IT Services Market Went Into Tailspin In 2012 Says Ovum Report

Will bad run continue in Europe – or does US upturn indicate a recovery is on its way?

Last year was the worst for IT services contract activity since 2002, according to research from Ovum, with volumes of business down 34 percent on the previous year. The private sector had its worst year since 1998.

It was the last quarter of the year which saw the steepest slump and brought down the average for the year. If the pattern is repeated this year, the IT services industry could be in for a sustained slump, according to the analyst.

Megadeals slump

Performance in the three months to the end of December 2012 fell well below the levels seen in the same period of 2011, which meant that annual IT services contract activity fell to its lowest level for 10 years, in terms of total contract value (TCV) and deal volume.

In Ovum’s IT Services Contracts Quarterly Analysis, 4Q12 report the TCV of deals announced in the fourth quarter of 2012 was $20.8bn, down 34 percent on the same period of the previous year. The number of deals fell 17 percent in the same period. “There was a notable lack of megadeals [contracts valued at $1bn or more],” noted the report.

Economic uncertainty has afflicted key markets for IT services and is the major cause of the weak performance of the industry in 2012, said Ed Thomas, the senior analyst in Ovum’s IT Services team. “Many enterprises remain wary of committing to major projects. Issues like the Eurozone crisis had a particularly significant impact,” said Thomas.

Public sector activity has fallen as governments come under pressure to cut public spending in the face of high debt levels, he said. “There’s a general reluctance to get involved in large-scale IT services deals.”

Half cut

The hardest hit were those in the services sector, where deals fell by 50 percent. In healthcare and financial services, contract volumes were down 39 percent and 18 percent respectively. Only the telecommunications and technology sector showed any growth in contracts.

Though Europe started the year as the leading market for private sector contract activity in 2012, the TCV generated by European enterprises actually declined sharply during the year, falling 31 percent to $16.7bn. But there was some evidence for optimism as private sector TCV in North America, having slumped dramatically in 2011, finished 2012 strongly with contract values up 48 per cent at $10.5bn.

“The last quarter of 2012 saw some notable awards from North American firms such as Procter & Gamble,” said Thomas. Is this a sign that the world’s largest economy is leading us out of recession? “It is too early to tell,” said Thomas.